How to Record Materials and Labour Separately: The Key to Clear Margins in Construction
For UK construction business owners, understanding your true project margins often feels like guesswork. The biggest reason? Materials and labour aren’t tracked separately.
When everything flows through one bucket, it’s impossible to see which jobs are profitable — and which are quietly draining your cash.
At Thomas Emlyn Ltd, we help construction companies build financial systems that show real profit per project, not just what’s left in the bank. Here’s how — and why — separating materials and labour is the foundation of stronger margins, healthier cashflow, and sustainable growth.
What’s the best way to record materials and labour separately?
Short answer:
Use job costing that links purchase invoices, payroll, and timesheets directly to each project — and categorise spend into materials, labour, subcontractors, and overheads.
Detailed answer:
The best setup combines:
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Xero Projects or Simpro for job costing
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Payroll and CIS systems integrated into Xero
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Supplier purchase orders linked to the job name or code
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Clear coding rules in your chart of accounts (materials, direct labour, subcontractors)
This gives you a true margin per job every month, allowing you to fix low-margin issues before they snowball.
Why separate materials and labour in construction accounting?
Short answer:
Because without it, you’re managing by guesswork — not data.
Detailed answer:
When you separate materials and labour:
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You can see margin erosion (e.g. rising material costs or low labour efficiency)
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You can price future jobs more accurately
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You gain control over cashflow, as materials are often paid before labour
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You meet CIS and VAT compliance standards more easily
For example, one client at Thomas Emlyn Ltd discovered they were losing 8% margin on small refurb projects — purely because subcontractor costs were logged as “general purchases.” Once separated, we helped them renegotiate rates and save £36,000 a year.
How to record materials correctly
Short answer:
Always allocate materials to the correct job when the invoice arrives — not at month-end.
Detailed answer:
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Use purchase orders linked to job numbers.
→ Example: “PO-247 – Finch Road Extension – Materials.” -
Match invoices from suppliers (e.g. Travis Perkins, Jewson) to those POs.
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Post to ‘Materials – Direct Cost’ in your accounting software.
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Reconcile monthly to confirm materials purchased = materials used.
This approach prevents “project leakage” — when unused materials are charged to one job but used on another.
🧱 Tip: Track large materials like steel, timber, and M&E kit separately from small consumables for better margin analysis.
How to record labour correctly
Short answer:
Use timesheets or payroll categories linked to specific jobs — ideally within your accounting software.
Detailed answer:
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Set up cost codes for each trade or crew (e.g. bricklaying, roofing, carpentry).
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Record hours worked via a timesheet app (Deputy, Simpro, or Xero Me).
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Post wages to ‘Direct Labour’ if employed, or ‘Subcontract Labour’ for CIS.
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Include employer NIC and pension for true labour cost.
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Reconcile with job progress each week.
One Thomas Emlyn Ltd client found that by linking labour to job stages, they identified underperformance early — saving an estimated £18k on one housing development.
What software makes this easier?
The best results come from connected systems, not spreadsheets. Here’s a tested setup:
| Function | Recommended Tool | Why it Works |
|---|---|---|
| Accounting | Xero | Job costing, bank feeds, CIS ready |
| Project costing | Xero Projects or Simpro | Live margin tracking |
| Payroll | Xero Payroll | Integrates with job codes |
| Timesheets | Deputy / Simpro Mobile | Site-level tracking |
| Materials ordering | Fergus / Tradify / Xero Purchase Orders | Links to supplier invoices |
💡 Thomas Emlyn Ltd integrates these tools for clients through our Virtual Finance Office service — so your data flows automatically from site to finance.
How does this improve cashflow?
Short answer:
You spot problems before the bank balance tells you.
Detailed answer:
By recording materials and labour separately, you can:
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Forecast future spend based on project progress
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Identify slow-paying clients faster
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See real-time gross profit per project
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Spot when labour efficiency drops, allowing course correction mid-project
Example: A London-based construction firm we advise reduced overdraft reliance by £75k in six months — just by improving cost visibility.
What reports should you use?
Use these core reports monthly:
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Job Profit & Loss – by project, showing material vs labour split.
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Cost-to-Complete – projects in progress with estimated final cost.
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Cashflow Forecast – including upcoming supplier payments and payroll.
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KPI Dashboard – labour % of sales, gross margin, and debtor days.
These are automatically produced in the Thomas Emlyn Virtual Finance Office, giving owners a clear financial picture every month — without the admin burden.
Common mistakes to avoid
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❌ Recording everything under “Purchases”
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❌ Ignoring small jobs (“it’s only £2k, we’ll sort later”)
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❌ Mixing subcontractor and direct labour costs
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❌ Not assigning job codes to supplier invoices
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❌ Leaving CIS deductions unlinked to projects
Each of these makes your margins look worse than they are — or hides problems until it’s too late.
FAQ: Recording Materials and Labour in Construction
1. Do I need separate bank accounts for materials and labour?
No, not separate accounts — but you do need separate cost codes or nominal categories in Xero. Keep the same business account, but ensure your bookkeeping distinguishes cost types for every transaction.
2. How does this link with CIS?
Subcontractor payments should post to “CIS Labour.” Your CIS returns then reconcile automatically with your job costing data — keeping HMRC and your margins aligned.
3. What if I buy materials on a subcontractor’s invoice?
Split the invoice: allocate labour to “CIS Labour” and materials to “Materials – Direct Cost.” This avoids overstating labour costs and underclaiming VAT.
4. How often should I review material and labour reports?
Weekly for live projects, monthly for board-level review. The key is consistency — not volume. A five-minute weekly review often prevents a £5,000 problem.
5. Can Thomas Emlyn Ltd set this up for us?
Yes. Our Virtual Finance Office builds custom job costing systems for construction companies — linking payroll, suppliers, and reporting for total clarity.
Final Thought
Separating materials and labour isn’t just better bookkeeping — it’s how construction companies build sustainable profit.
When you know where the money’s going, you can make better bids, manage cashflow proactively, and scale confidently.
👉 Next Step: If you’d like help setting this up, book a 15-minute discovery call with us to discuss your Virtual Finance Office.
Thomas Emlyn Ltd
Stronger Margins – Healthier Cashflow – Sustainable Growth
